The Time to Buy is Now

For the most part, the investment community has been holding back on commercial real estate acquisitions, waiting and waiting for the market to hit bottom. But according to a new report by CB Richard Ellis Investors, while the bottom may not be at hand just yet, it’s close enough.

Speculation that the market bottom may be near is not pure speculation, there are three reliable indicators; history is one of them. As CBRE Investors’ points out in its new quarterly report, the cumulative NCREIF Property Index depreciation over the last four quarters totals -19.1 percent (of note, the NPI experienced depreciation of -9.5 percent and -8.7 percent in the fourth quarter of 2008 and the first quarter of 2009, respectively). Comparatively, when observing the major real estate slump of the early 1990s, it took the NPI more than twice as long--an aggregate 10 quarters--to experience the same decline.

“This means that while the pricing downturn in the early 1990s took many years to bottom out, the current downturn is much steeper and, therefore, maybe shorter,” the report notes of the first of the three indicators. “At this point, we don’t know if we’re at the bottom, but it appears we’re pretty close, from the pricing perspective,” Lee Menifee, Global Strategy senior director with CBRE Investors, told CPN. “Over the last two or three months, there’s been a firming of prices on income-producing assets with secure tenants, especially smaller deals.”

In a ddition to the NPI pattern, the past behavior of publicly traded REITs acts as an indicator. U.S. REITs, over the years, have served as a leading indicator of private market pricing reductions and recoveries. REITs began their downward spiral in early 2007, while the NPI began its downfall in mid-2008. “Just as REITs led the private markets in 2007 and 2008,” the report concludes, “it is probable that the recent share price recovery is an early indicator that a trough in private markets is coming soon.”

The third sign that the bottom may be within close reach involves transaction volumes, and the fact that they are so low, there’s only one way to go, and that’s upward. “As cash constrained owners increasingly become unwilling sellers, transaction activity will pick up,” according to the report. “An increase in sales will provide needed pricing information to both buyers and sellers. This transparency will both encourage more sellers to offer properties at realistic prices and provide buyers with the confidence to re-enter the market.”

The credit market continues to20be quite inhospitable, but for those who are in the position to buy, the waiting game should be over. “If you are purely focused on not buying until the market hits bottom, then you are not going to buy until

after the bottom hits,” Menifee said. “The point is to be somewhere close to the bottom; if you’re looking for absolute certainty, you won’t get it.” Some investors do get it. “German retail investors investing in open-ended funds are very active in the U.S. They took a breather in 2007 and shut down, but now they’re looking for secure, income-producing assets.”

Looking ahead, transaction volume is on track to increase, with more coveted acquisition opportunities on the horizon. “More deals will be coming to the market in the next 12 to 18 months as sellers become more realistic,” Menifee explained. “The bid-ask gap is closing, although it is taking longer than everyone expected. But the big rush of capital back into assets is a ways off. There are still significant hurdles to overcome in terms of expectations of rent growth and leasing, but property prices are reflecting that; prices are reflecting that downside.”

So, now really is the time to buy; holding out for rock bottom may very well result in lost opportunities. “There’s been so much focus on the downside, particularly over the last year, and there’s been good reason to be mindful about buying properties,” he said. “But much of the downturn has passed and much of the re-pricing has happened. You can still be in defensive mode, but you can buy properties on that basis. In the market now, there are more attractive opportunities, so you don’t need to be an aggressive buyer to take advantage of those opportunities.”

By: Barbara Murray, Contributing Editor to Commercial Property News

New Loan Originations May Trump Scavenger Investor Rush

A couple of significant news items came crashing onto the desks of industry execs recently. And these news items are swiftly bringing current market conditions into sharper focus. First, Normandy Real Estate Partners and Five Mile Capital Partners in late March bought the John Hancock Tower in Boston for $660.5 million, a far cry from the $1.3 billion paid three years ago by Broadway Partners.

The prized Class-A property was purchased from the trustees to manage the property back into an attractive, income-producing asset.

The absence of bidders underscores how risk-averse investors are when it comes to buying distressed properties. This stance is reflected by fund managers facing calls from investor clients to redeem holdings and as feasible exit strategies for troubled assets dwindle.

The second news headline to recently emerge was that research analysts at Clerestory Capital, a New York manager for a fund of funds, told its investor clients that over the past six months 32 real estate opportunity funds opted to stop or put fundraising efforts on hold. About $52 billion of potential opportunity funds were affected.

The primary reason offered was that general partners — the lead investors and fund sponsors — are finding few limited partners who are comfortable with market conditions surrounding the refinance or sale of troubled assets today. Another reason cited by Clerestory Capital was that fewer real opportunities exist in the face of many owners refusing to sell at scavenger prices.

Instead of chasing what has often turned out to be elusive deals for distressed properties and notes, lenders, investors and operators all are opting to focus on managing current loans on their books, or properties in their portfolios. And effective asset management is proving to be the strategy of choice, especially as investors watch developments like the fire sale of the John Hancock Tower.

The Netherlands-based ING Real Estate has indefinitely nixed a plan for its first-ever global opportunity fund. ING opted instead to focus on its massive €66.5 billion real estate asset management program. Due to fallout from the credit crunch, the global real estate giant’s current assets under management are significantly less than the €107.2 portfolio it held at the end of 2007.

Fund and portfolio managers are seeking to distance themselves from the rest of the pack by flexing their asset management muscles. Such capabilities are attracting yield-hungry investors weary of the high-risk returns.

Even the dormant lending business today is concentrating on the asset management aspect of real estate finance. A property that is a candidate for financing now must be a high-quality asset in a major metropolitan market. The borrower must have a stellar credit rating and in most cases be seeking low leverage of approximately 65% loan-to-value on purchases, and as low as 50% loan-to-value on refinancings.

Oakland, Calif.-based research firm Foresight Analytics recently issued a report in which it estimates $250 billion of commercial and multifamily mortgages are set to mature in the U.S. this year alone, and over $800 billion between 2009 and 2011. Even though the firm is predicting growth in loan originations will be “minimal” in the next decade, there will be ample lending and debt investment opportunities for prudent lenders and their investors in the coming months and years.

To be sure, property owners and asset managers are diligently seeking resolution to troubled assets today. Thus loan originations — particularly viable refinance activities — will become a pivotal turning point for the commercial real estate finance and investment business. And high-yield investors are seeking to capitalize on the current void in the debt finance marketplace.

As managers continue to halt plans for opportunity and distressed investment funds, the bid-ask price gap for both properties and mortgage notes presents opportunities. The time is fast approaching when lenders will once again emerge. For instance, Wrightwood Capital just announced it has closed its latest high-yield lending fund.

Well-capitalized lenders that can price new loans based on current market risk will likely emerge as the leaders of the next real estate cycle. And these lenders will have their pick of the highest quality transactions in the coming months.

Newsletter Volume 1

FED Throws TALF Lifeline to 

 Commercial Real Estate 

By Alister Bull 

WASHINGTON (Reuters) - The U.S. Federal Reserve threw the battered com- 

mercial property sector a lifeline by granting it access to an emergency program 

set up last year to unlock credit markets frozen by a global financial crisis. 

The Fed said its $200 billion Term Asset-Backed Securities Loan Facility, which 

it has already said may grow to $1 trillion in size, will be opened from June to 

commercial mortgage-backed securities that were issued in 2009. 

The TALF was launched last November as policy-makers fought a financial crisis 

sparked by the collapse of the U.S. housing market that has inflicted the worst 

recession in a generation. 

“The inclusion of CMBS as eligible collateral for TALF loans will help prevent 

defaults on economically viable commercial properties, increase the capacity of 

current holders of maturing mortgages to make additional loans, and facilitate the 

sale of distressed properties,” it said in a statement. 

“CMBS accounted for almost half of all new commercial mortgage originations 

in 2007,” the Fed said. 

Risk premiums on commercial mortgage-backed securities rose after the Fed’s 

announcement, with traders disappointed that the expansion did not include older 

and lower rated assets. As part of a broader government effort to remove bad as- 

sets from bank balance sheets, the Treasury has said the TALF will be expanded 

to cover these so-called “legacy assets”, but the timing is still unclear. 

Risk premiums on a derivative index of “AAA” rated CMBS climbed about 0.5 

percentage point on Friday, to more than 5 percentage points above its interest rate 

benchmark. The spread has declined from nearly 8 percentage points in March. 

The Fed also said the TALF would be opened to securities backed by loans used 

by small businesses to obtain property and casualty insurance. 

Currently, all TALF loans have maturities of three years. The Fed said from June, 

TALF loans with maturities of five years would be available for CMBS, as well as 

securities backed by student loans and loans to small businesses. 

It also said that up to $100 billion of TALF loans could have five-year maturi- 

ties, and that limit will be kept under evaluation, in a hint that it could be lifted 

if necessary. 

U.S. central bankers are wary about clogging up the Fed’s balance sheet with lon- 

ger-dated assets that may hamper their ability to reduce its size as the economy 

recovers, which will be important to keep inflation in check. 

The Fed balance sheet has already been more than doubled in size as policy- 

makers pumped over $1 trillion into credit markets to prevent the financial crisis 

getting much worse. 

To allay these concerns, interest on collateral financed with a five-year loan may 

be diverted toward an accelerated repayment of the loan, especially in years four 

and five, to encourage borrowers to exit the program and return to the private 

sector. 

The Fed launched its TALF program in November 2008 as an emergency re- 

sponse to the seizure of the asset-backed securities market amid panic over losses 

following the failure of investment bank Lehman Brothers in September. 

The decision to allow loans of up to five years bows to steady pressure from the 

investment community, which the central bank had initially resisted because of 

concerns that it would make the task of managing its balance sheet harder. 

Commercial real estate is following the slump in residential property as the U.S. 

recession reduces land values and the revenue needed to pay debt. 

Fed officials have said they are concerned about the possibility of rising problems 

in commercial properties, which could increase pressure on commercial banks. 

Citigroup estimates commercial property delinquencies could rise to 4 percent 

this year and 8 percent in 2010 from about 2.5 percent last month. 

Longer-term financing matters to investors in commercial real estate debt because 

the underlying mortgages are usually for longer terms, and investors would be less 

willing to hold these securities without the longer-term financing. 

(Additional reporting by Mark Felsenthal in Washington and Al Yoon and Kris- 

tina Cooke in York; Editing by Andrea Ricci) 

CCRB Services

Chicago Commercial Realty Brokerage is an unconventional commercial real estate firm because we offer business consultation together with the conventional real estate services. We specialize in tenant and buyer representation.  We don’t carry any listings since there is an abundance of inventory already on the market. 

 

We are serious about our services and we deal with serious clients who are ready, willing and able to make a move.  You have no time to wait for our services while we work with “tire kickers” so this is why we charge a retainer; to ensure that our time and effort is respected and more importantly yours is as well.  Our fee is simple; we set up a minimum retainer of $495 and a maximum retainer of $4,950.  Everything in between will be charged one tenth of one percent of the buyer’s median purchasing budget. 

 

As far as leases are considered we collect a minimum of $495 and a maximum retainer of $4,950.  Leases falling in between the minimum and maximum will be charged a retainer of 1% of the anticipated 12 months lease budget.

 

Aside from the prompt service we provide, what also differentiates us from other traditional brokerage houses is that we offer business consultation that can reduce overhead costs, save jobs and help business go green in the process.  This is a multifaceted approach to aid small to medium sized companies survive these tough economic times.  Our earnings will directly correspond to the amount of money we will save the client.  There are no actual out-of-pocket expenses, as the client will agree to pay CCRB the difference in the savings of rent for a 1-3 month period, depending on the amount of savings incurred.  

 

Through our business consultation we will review the current space of the business, determine the amount of space per employee, review the current lease/mortgage, consult with our brilliant team of IT professionals, debt consolidators, and telecom professionals and devise a plan to cut overhead, salary and utilities.  

 

As an example of what could be done for an office size of 25 people.  After analysis it is determined that16 office based employees can work from home with a computer system called a thin client.  This allows employees to access all programs from the central server located in the main office.  It is very secure as it only allows the home-based employees access to files and programs permitted by the owner or the head of the office.  The cost for this technology is relatively inexpensive and the overall cost savings can pay for the technology within four to six months of installation. 

 

As far as the communications aspect of the business, a simple VOIP phone system can be utilized so that no matter where an employee is stationed, he/she has complete access to make and receive phone calls wherever an Internet connection is available

 

By allowing employees to work from home, a small salary cut is likely as they most likely will be more than willing to take a small cut in order to save money in the long run.  The employee will not have to pay for fuel, vehicle maintenance, new wardrobes, and dry-cleaning, and other daily expenses such as going out to lunch, parking and commuting time.

 

Management may feel as if they are losing control by allowing employees the “freedom” from working at home.  This may not be the case as there are several ways to monitor the employees’ production.  With both the VOIP phone system and the slim client management can view the amount of time spent on the computer and on the phone.  Also, a proactive approach to looking at an employee’s production is a simple and perhaps the most effective way to monitor them. 

 

When we talk about going green and sending workers home to work, we a talking about lessening the company’s carbon footprint.  By reducing the amount utilities used in the office, reducing the greenhouse gasses used by the daily commute, and even relocating to a Leed certified building, the company can take the lead in environmental conservation.

 

Our initial evaluation of an office is free of charge.